U.S. Senators Elizabeth Warren (D-Mass.) and Bob Menendez (D-N.J.) introduced the Student Loan Tax Relief Act, which eliminates the hidden tax on forgiven student loan debt, to protect American students and their families from continued financial hardship, while bolstering long-term U.S. economic growth.
The bill is cosponsored by Sens. Ron Wyden (D-Ore.), Debbie Stabenow (D-Mich.) and Cory Booker (D-N.J.).
“Students and families are being crushed by student debt, dragging down the economy and holding back an entire generation in its pursuit of the American dream,” said Sen. Menendez, a senior member of the Senate Finance Committee. “If you’re able to get your student loans forgiven and secure a fresh financial start, you shouldn’t then be saddled with an unexpected tax bill. This places an unfair added burden, especially on families grappling with a tragic loss who inherit the debt from students who will never be able to pay back their loans.”
“There are a very limited number of circumstances under which student loan debt can be forgiven, such as the total and permanent disability of the borrower. Unfortunately, the tax consequences of student loan forgiveness is a mess. Sometimes the government charges students taxes and other times there are no taxes if the student loans are forgiven. This bill will give peace of mind to borrowers who have earned the right to have their student loans discharged by ensuring they don’t get stuck with a big tax bill when that happens,” said Sen. Warren.
“Congress has to do more to help families and students get a good education without also facing debilitating student loan debt,” said Sen. Wyden. “Most don’t even realize that if they are in a position to have their student loans forgiven, the tax code looks at this as phantom income and throws a hefty tax bill their way. This bill aims to end this nasty unexpected tax, better positioning students to save for retirement or buy their first home after school.”
“So many families across the country, including many in Michigan, are forced to deal with crippling student debt,” said Sen. Stabenow. “This legislation would ensure that families whose student loans are forgiven, such as in the case of a child passing away or becoming disabled, will not be hit with additional taxes. For those families, an additional tax burden is the last thing they need.”
“Our greatest national resource is the genius of our young people,” Sen. Booker said. “We should be doing more to support young Americans in their pursuit of higher education, not burdening them with hidden taxes. Remarkably, if your student loan is forgiven, the federal government doesn’t forgive the resulting tax bill. Our bill would institute a common sense change so young people and all student loan borrowers participating in loan forgiveness programs aren’t excessively taxed.”
The bill amends the Internal Revenue Code of 1986 to exempt student loans discharged for any reason from being taxed as income, including through participation in the federal income-based repayment (IBR) and income-contingent repayment (ICR) loan forgiveness programs; through death or disability of the recipient; or due to fraud by an institution of higher education, known as “borrower defense to repayment.”
The Internal Revenue Service (IRS) currently taxes federal student loan amounts that are forgiven through IBR and ICR, death, or total and permanent disability of the recipient. With outstanding student debt in the United States eclipsing $1.2 trillion and slowing the economy, taxing forgiven loans defeats the purpose of alleviating the burden and further exacerbates the nation’s student debt crisis.
Last year, Sen. Warren helped secure favorable tax guidance for borrowers defrauded by Corinthian Colleges. Upon learning that the loans discharged under the Education Department’s Borrower Defense to Repayment authority may be considered taxable income, Senator Warren sent a letter to the Treasury Department with Sens. Durbin and Brown and Congresswoman Waters, specifying Treasury’s options for providing relief.
In December, Treasury published guidance stating “the Internal Revenue Service (IRS) will not assert that certain taxpayers, whose Federal student loans are discharged under the Department of Education’s ‘Defense to Repayment’ discharge process, must recognize gross income as a result of this discharge process.”
Despite this success, inconsistent tax treatment remains for other categories of student loan discharges.
Full text of the bill can be found here.